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Japan's financial regulator will fine an Ernst & Young affiliate 2.1 billion yen ($17.4 million) after the firm's audit of Toshiba Corp failed to spot accounting irregularities in the country's worst accounting scandal in four years.

The Financial Services Agency (FSA) said on Tuesday it would also suspend Ernst & Young ShinNihon LLC from taking on new business contracts for three months.

Toshiba is restructuring after the accounting scandal, in which the company said it overstated profits over several years. . On Monday, Toshiba said it would make a record net loss this year and cut jobs.

The FSA said the fine was equivalent to two years' auditing fees ShinNihon received from Toshiba.

"There was a grave breach of duty," an FSA senior official said at a briefing. "The accountants were in charge of Toshiba for many years and they had built a misplaced sense of confidence that Toshiba would not do such things," the official, who declined to be named, said.

ShinNihon is the biggest accounting firm in Japan, with about 3,500 certified accountants and more than 4,000 clients.

Koichi Hanabusa, chairman and CEO of ShinNihon said in a statement he would take responsibility for the affair and step down at the end of January, when the accounting firm is expected to compile a business improvement plan demanded by the FSA.

"It is very regrettable that we have come to this situation," he said.

Earlier this month, Japan's securities watchdog recommended Toshiba be fined a record 7.37 billion yen for its accounting violation. The scandal has been a setback for the government's efforts to attract international investors to Japan.